With many big-name issuers having either significantly reduced their presence in the market (Barclays, Santander) or retreated from it altogether (RBS, HSBC, Lloyds), the retail structured product landscape in the UK has transformed dramatically in the last four years. SRP data shows that total volumes sold have fallen from their peak of £12.6bn in 2010 to £2.5bn year-to-date, an 80% drop.
The 2008 financial crisis, the subsequent onslaught of derivative-based products by the press and the introduction of the Retail Distribution Review (RDR) are three major factors to have contributed to the market’s contraction. The retail market is consolidating, with fewer active issuers and a rise in third-party distribution relationships between manufacturers, brokers and asset managers.
Meanwhile, subject to less regulatory scrutiny, fewer compliance costs and more sophisticated investors (not to mention greater profit margins), the Private Banking space appears to be an increasingly attractive arena for issuers no longer focused on retail products. SRP spoke to Alex Brandreth, head of structured products and deputy fund manager at UK private bank Brown Shipley, to get his perspective on the evolution of structured products in the private banking space.
How long has Brown Shipley been distributing structured products?
Brown Shipley builds diversified portfolios for clients; structured products are one of the asset classes we use to populate a portfolio. We started distributing structured products in 2007. However, the use of structured products has increased over the last few years. I joined Brown Shipley in July 2010 and have been responsible for our structured product investment since then, and more recently, I have been made head of structured products.
With increasing regulation and the end of the bancassurance model for banks selling retail structured products directly to the end-investor, many big-name providers have scaled back their operations or exited the advisory space in the last two years. Increasingly, these issuers seem to have turned their efforts to the private banking space. Would you agree?
There have been a number of issues in recent past with banks selling retail structured products direct to clients. Whilst there have been a number of factors, one key issue has been that many products have failed to deliver the returns promised. Against this background, it is unsurprising to see that some banks have retrenched from this sector. Our integrated wealth management model, with a clear focus on providing the highest levels of client service, is benefitting from this movement in the market.
The private banking space seems to offer issuers a less costly and more efficient way to sell structured products directly to investors, rather than through Independent Financial advisers (IFAs). What other benefits are there to selling products in the private banking space?
What is key to Brown Shipley is the delivery of a high quality service to our clients. Our process is geared to ensure we achieve best execution and prices for our clients, therefore delivering strong returns.
How do you see the private banking space developing?
We see greater consolidation in the industry as private banking/wealth management businesses seek to achieve cost efficiencies to ensure they are best positioned to provide a dynamic high quality service to their clients.
What are your views on complexity in structured products? How do private banking products differ from retail products in terms of complexity? Is there room for more complex structures in the retail space?
We are not great fans of complexity within structured products and prefer to keep things simple. We use structured products as components of diversified investment portfolios comprising complementary asset classes. We believe the pricing we achieve – and deliver to our clients – compares very favourably with those on offer via retail distribution.
Does Brown Shipley favour any particular wrapper?
The vast majority of client assets at Brown Shipley is invested in securities (equities and bonds) and collective investment funds. However, the use of structured products has increased in the recent past. We are most active with individual structured products linked to well-known indices (e.g. FTSE 100) which mostly have an element of capital-at-risk at maturity. However, we have also recently used a fund of structured products (AHFM Structured Product fund) because it is allowable in Offshore Bonds, whilst most offshore bond providers prohibit structured product investment.
What are the typical payoffs for Brown Shipley products?
With regard to structured products, most of our activity is in autocalls (both classic, defensive, single and dual indices). The typical payoff in an autocall (that matures in the first year) has varied between 10% and 16%. More recently, income accrual structured products have been popular; the typical payoff we have been receiving here is a 7% income distribution.
What kind of underlying exposure are Brown Shipley clients demanding? What do you see as being the most sought after underlyings/markets?
In reference specifically to structured products, as a UK investor most of the products we issue have an underlying exposure to the FTSE100, but we have also used the Eurostoxx50, Nikkei225, Russell2000 and S&P500. The Nikkei225 product we created was a bull note with 118% of the positive move of the index. We launched this product in May 2014, on client demand, and the Japanese market has increased dramatically over recent months resulting in the price of this product now being over 130p (having been launched at 100p).
Does Brown Shipley work with any particular banks? Are there any minimum requirements (e.g. credit) in the use of counterparties at Brown Shipley?
For structured products at Brown Shipley we have an approved list of banks that we use, and the typical requirement is a minimum credit rating of Standard & Poor’s A-. When we are pricing a new product, we go to a number of banks and make them compete for our capital, which ensures that we go to banks with the best current pricing and the clients get the best possible returns. We also have concentration limits within portfolios to ensure that exposure to one counterparty is never excessive.
Do you think there will be a significant shift toward the private banking space because of the suitability issues in the retail space?
One of the key dynamics in the market at present is the increased propensity of IFAs to outsource discretionary investment management to third party investment managers and/or private banks – I anticipate this trend will continue.